King & Wood, P.A.

Is Extending Required Minimum Distributions a Good Thing?

“The first SECURE Act extended the beginning date for taking required minimum distributions from the year after the account owner reaches age 70½ until they reach age 72. Just three years later, ‘SECURE Act 2.0’ has extended this age to 73, and offers a further provision for extending it again, to age 75, beginning in 2033.”

The question is, are these extensions a good thing, or a trap for people who aren’t up on the latest rules? A key concept is the difference in how couples and singles are taxed. The income level at which singles reach tax bracket thresholds is half that of married people filing jointly, explains a recent article titled “Are Extended RMDs A Gold Mine Or Tax Trap?” from Financial Advisor.

For example, a retired couple reaches 70½ this year. They’ll have an RMD of $89,450 from their combined $2 million plus in IRAs. They also receive $27,700 in interest and dividend income during the year—exactly equal to the standard deduction for a married couple filing jointly. The federal income tax liability would be $10,294 (not including taxes on Social Security benefits).

Let’s say they opt not to withdraw the $89,450 during 2023. Instead, they wait and one of the spouses dies. The surviving spouse then withdraws $89,450 as a widow. The survivor’s federal income tax liability on the same amount becomes $18,192, or almost 77% higher than if both spouses were still living. The “single filer” penalty is an issue.

What’s more, the children of our example are likely to face a higher income tax rate on what’s left in their parents’ IRA when both pass away. They are likely to be in their peak earnings years at that point and have only ten years at most to take the entire payout after their parents die.

Finally, if the married couple takes IRA withdrawals earlier rather than later, they’ll see a step-up in basis for all the after-tax funds they’ve allowed to appreciate for the rest of their lives. This eliminates all income tax on the appreciation. This is an important income tax benefit you don’t get from IRA receipts after the death of the account owner. Perhaps this is what Congress had in mind when it extended the starting date for RMDs not once, but three times.

It could be argued that singles, including surviving spouses, will see IRAs grow more if they put off distribution even longer. However, eventually bigger amounts may push individuals or families into a higher income tax bracket later on, and the undistributed IRA would not get a step-up in income tax basis on the death of the original owners. The undistributed IRA amount also can’t be rolled into a Roth IRA.

Tax brackets strategies can be improved if the couple takes withdrawals before they turn 70 ½, as long as they are retired and not in a high-income tax bracket. By taking increasing RMDs later in life, it’s possible to increase the federal income tax bracket, and risk triggering the single-filer penalty on the widowed spouse.

Estate planning for the SECURE Act means if you haven’t had your estate plan reviewed in the last two or three years, it’s time to make an appointment with an estate planning attorney. These changes in the law may create new opportunities, or your existing estate plan may not be properly structured to address the changes brought about by Congress.

Reference: Financial Advisor (March 1, 2023) “Are Extended RMDs A Gold Mine Or Tax Trap?”

What are RMD Rules for 2023?

“The SECURE 2.0 Act, which was signed into law in December 2022, changes the RMD rules for retirement savers beginning in 2023.”

After a certain age, retirement account owners are required to take minimum distributions from traditional IRAs and 401(k)s. The SECURE 2.0 Act has changed the rules, reports the article “New RMD Rules for 2023” from U.S. News & World Report.

Before the SECURE 2.0 Act, the age to start RMDs was 72 for retirement accounts, including both traditional IRAs and 401(k)s. Now, the RMD age has increased in two steps. Starting in 2023, the RMD age increases to 73, and in 2033, the RMD age will increase to 75. If you were born between 1951 and 1959, you’ll need to start RMDs after age 73. Born after 1960? You can delay RMDs until after age 75.

There are important deadlines, and while you get extra time to take your first RMD, you must take subsequent RMDs every calendar year.

Here’s the twist: remember, RMDs are taxable. If you take your first RMD in 2023 because you celebrate your 72^nd birthday that year, you’ll have some decisions to make. You can take the RMD by December 31, 2024, or delay it to no later than April 1, 2025. But if you delay it to April 2025, you’ll take two RMDs in one tax year.

If your income from Social Security and other sources is more than you need, those higher ages for RMDs have their advantages. Retirement savings accounts may grow tax-free for a longer period of time. The change may also bring savings in Medicare costs. The price of Medicare premiums is tied to income. When retirees take distributions from pre-tax retirement accounts, it increases their income and their premiums. By waiting on withdrawals, income can be lowered, leading to lower Medicare premiums at that time.

However, the delay in taking distributions may also lead to higher taxes during later stages of retirement. If you don’t take funds early, you may find yourself with higher RMDs later, leading to larger tax bills.

Account owners who don’t take an RMD at the right time usually face harsh penalties. Prior to the SECURE 2.0 Act, the tax penalty was 50% on their required amount not withdrawn. Now the penalty is 25%. If the mistake is corrected quickly, the penalty can even decline to 10%, as long as the person can demonstrate the missed RMD was due to an error and reasonable steps are being taken to resolve the issue.

There are changes to qualified charitable distributions as well. Account owners age 70 ½ and older may now make IRA qualified charitable distributions of up to $100,000 per year without owing income tax on the transaction, which can count as their RMD for the year. The qualified charitable distribution limit is now linked to inflation and may increase in future years. A one-time gift of $50,000 may be made directly to an eligible entity through a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.

Based on the SECURE Act 2.0, Roth 401(k) account owners no longer have to take RMDs at all. This aligns the Roth 401(k) with Roth IRAs, which also do not require any distributions in retirement.

Reference: U.S. News & World Report (Feb. 10, 2023) “New RMD Rules for 2023”

Beneficiary Mistakes to Avoid

“Before making a decision on a beneficiary, it's very important to check your state laws. Some states have different rules on who you can name as a beneficiary.”

Planning for one’s eventual death can be a somber task. However, consider what would occur if you failed to plan: loved ones trying to figure out your intentions, a long and expensive legal battle with unintended heirs and instead of grieving your loss, wondering why you didn’t take care of business while you were living. Planning suddenly becomes far more appealing, doesn’t it?

A recent article from yahoo! finance, “5 Retirement Plan Beneficiary Mistakes to Avoid,” explains how to avoid some of the issues regarding beneficiaries.

You haven’t named a beneficiary for your retirement accounts. This is a common estate planning mistake, even though it seems so obvious. A beneficiary can be a person, a charity, a trust, or your estate. Your estate planning attorney will be able to help you identify likely beneficiaries and ensure they are eligible.

You forgot to review your beneficiary designations for many years. Most people have changes in relationships as they move through the stages of life. The same person who was your best friend in your twenties might not even be in your life in your sixties. However, if you don’t check on beneficiary designations on a regular basis, you may be leaving your retirement accounts to people who haven’t heard from you in decades and disinheriting loved ones. Every time you update your estate plan, which should be every three to five years, check your beneficiary designations.

You didn’t name your spouse as a primary beneficiary for a retirement account. When Congress passed the 2019 SECURE Act, the bill removed a provision allowing non-spousal beneficiaries to stretch out disbursements from IRAs over their lifetimes, also known as the “Stretch IRA.” A non-spouse beneficiary must empty any inherited IRA within ten years from the death of the account holder. If a minor child is the beneficiary, once they reach the age of legal majority, they are required to follow the rules of a Required Minimum Distribution. Having a spouse named as beneficiary allows them to move the inherited IRA funds into their own IRA and take out assets as they wish.

You named an estate as a beneficiary. You can name your estate as a beneficiary. However, it creates a significant tangle for the family who has to set things right. For instance, if you have any debt, your estate could be attached by creditors. Your estate may also go through probate court, a court-supervised process to validate your will, have your final assets identified and have debts paid before any remaining assets are distributed to heirs.

You didn’t create a retirement plan until late in your career. Retirement seems very far away during your twenties, thirties and even forties. However, the years pass and suddenly you’re looking at retirement without enough money set aside. Creating an estate plan early in your working life shifts your focus, so you understand how important it is to have a retirement plan.

An experienced estate planning attorney can help square away your beneficiary designations as part of your overall estate plan. The best time to start? How about today?

Reference: yahoo! finance (Dec. 19, 2022) “5 Retirement Plan Beneficiary Mistakes to Avoid”

How Charitable Giving Benefits the Giver

“With a charitable tax deduction, you can donate to a good cause and cut your tax bill at the same time.”

A charitable donation tax deduction feels good in a few ways. Not only do you feel good about giving to a good cause, but you’re also cutting your tax bill. However, before you start writing checks or making online donations, you should know what rules to follow to ensure your good-hearted gifting is giving you tax deductions, explains the article “Charitable Donation Tax Deductions: An Additional Reward for the Gift of Giving” from Kiplinger.

First, you’ll need to itemize to claim a charitable tax deduction. If you took the standard deduction on your 2020 or 2021 tax return, you could also claim up to $300 for cash donations to charity. This deduction wasn’t available to taxpayers who claimed itemized deductions on Schedule A. This deduction wasn’t extended past 2021, so you can’t claim a charitable donation tax deduction on your 2022 tax return. For 2022 and beyond, you’ll have to itemize if you want to write off gifts to charity.

If your standard deduction is a little higher than your itemized deduction, consolidate charitable deductions from the next few years into the current tax years, known as “bunching.” This lets you boost your itemized deductions for the current year, so they exceed your standard deduction amount. Consider using a Donor Advised Fund, where you can make one large contribution to a fund and deduct the entire amount as an itemized deduction in the year you make it. Just be sure your donations align with your estate plan.

How do you know what donations are deductible? Contributions of cash or property are generally deductible. If you donate property, the deduction is equal to the property’s fair market value. If you give appreciated property, you may have to reduce the fair market value by the amount of appreciation when calculating the deduction. If the property has decreased, your deduction is limited to the current fair market value.

There are certain requirements and limitations for charitable tax deductions. For gifts of $250 or more, you must have a written acknowledgment from the charity stating the amount of a cash donation and a description of any donated property, but not value, and whether or not you received any goods or services in return for your contribution. At certain valuation points, you’ll need to file certain forms and if you donate a car, boat, or airplane worth more than $5,000, you may need to have the property appraised also.

Just because your donation was used for a good cause doesn’t mean you can deduct it. Only contributions to certain charitable organizations are deductible. For instance, if a neighbor starts a Go Fund Me page, those donations, while greatly appreciated, are not tax deductible.

The IRS makes it easy to determine if any donations are tax deductible with the Tax Exempt Organization Search tool on its website to find out if an organization is tax-exempt.

For seniors who are at least 70 ½ years old, you can transfer up to $100,000 directly from a traditional IRA to charity through a Qualified Charitable Distribution (QCD). The charitable donations made by eligible seniors via a QCD aren’t deducible. However, you can still save on taxes, since QCDs aren’t included in taxable income.

QCDs also count towards senior’s Required Minimum Distribution, without adding to your adjusted gross income.

Reference: Kiplinger (Nov. 28, 2022) “Charitable Donation Tax Deductions: An Additional Reward for the Gift of Giving”

What Happens when You Inherit a Retirement Account?

“There’s almost always a reckoning when the government proffers a tax break. So it is with individual retirement accounts (IRA)s, 401(k)s and similar accounts that investors fund with pre-tax earnings.”

The SECURE Act of 2019 reset the game for IRAs and other tax deferred retirement accounts, says a recent article from Financial Advisor titled “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair.” Prior to SECURE, investors paid ordinary income tax rates on withdrawals, whether they were voluntary or Required Minimum Distributions (RMDs) from these accounts, except for Roths. When individuals stopped working and their income dropped, so did the tax rate on their withdrawals. All was well.

Then the SECURE Act came along, with good intentions. The time period for payouts of IRAs and similar accounts after the death of the account owner changed. Non-spouse beneficiaries now have only 10 years to empty out the accounts, setting themselves up for potentially huge tax bills, possibly when their own incomes are at peak levels. What can be done?

Heirs of individual investors or couples with hefty IRAs and investment accounts are most likely to face consequences of the new tax regulations for RMDs and inheritances from the SECURE Act.

A widowed spouse faces the lower of either their own or the partner’s RMD rate—it’s tied to birth years. However, there is a pitfall: the widowed spouse files a single tax return, which cuts available deductions in half and changes tax brackets. Single or married, consider accelerating IRA withdrawals as soon as taxable income lowers early in retirement. Taking withdrawals from IRAs at this time voluntarily often means the ability to defer and as a result, optimize Social Security benefits to age 70.

For non-spousal beneficiaries of inherited IRAs, there’s no way around that 10-year rule. Their tax rates will depend on income, whether they file single or joint and any deductions available. If a beneficiary dies while the account still owns the assets, those assets may be subject to estate taxes, which are high.

Here’s where tax planning is could help. IRA owners may try to “equalize” inheritances among heirs with tax consequences in mind. For instance, a lower earning child could be the IRA beneficiary, while a higher earning child could receive assets from a brokerage account or Roth IRAs. Alternatively, an IRA owner could establish trusts or make charitable bequests to empty the IRAs before they become part of the estate.

Your estate planning attorney will help you create a road map for distributing IRA and other tax deferred assets based on the tax and timing for beneficiaries or what you want to fund after you pass.

Another strategy, if you don’t expect to exhaust your IRA assets in your lifetime, is to systematically withdraw money early in retirement to fund Roth IRAs, known as a Roth conversion. The advantage is simple: inherited Roth IRAs need to be drawn down in ten years, but the money isn’t taxable to beneficiaries.

Decumulation planning is complicated to do. However, your estate planning attorney will help evaluate your unique situation and create the optimal income sourcing plan for your family based on their assets, including taxable and tax-advantaged accounts, Social Security benefits, pensions, life insurance and annuities.

Reference: Financial Advisor (Sep. 29, 2022) “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair”

Can I Use an IRA to Reduce Estate Taxes?

“There’s a tax-smart way to make bequests by using assets from individual retirement accounts at death.”

While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth consideration.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

How Can I Avoid 401(k) Early Withdrawal Fees?

“If you need to withdraw funds from an individual retirement account or 401(k) account before age 59 1/2, there's usually a 10% early withdrawal penalty.”

Life doesn’t always go according to plan. Sometimes, even the best financial plan gets a wrinkle, requiring funds to be withdrawn from retirement accounts. This usually comes with both a long-term cost and a penalty. However, a recent article from U.S. News & World Report titled “What is Rule 72(t)?” explains that there’s a work-around.

Rule 72(t) waives the 10% penalty. However, it is only if you take the distributions in a highly specific way. IRS Rule 72(t) allows an early retirement plan withdrawal with no penalty as long as you meet the following qualifications:

1. All retirement plan-holders must abide by the rules.
2. All retirement plan withdrawals must adhere to the IRS guidelines.
3. Plan distribution amounts may not be adjusted for inflation.
4. Funds withdrawn from traditional retirement accounts are taxable.

What is Rule 72(t)? This rule allows retirement account holders the ability to set up regular withdrawals defined very specifically as substantially equal periodic payments (SEPPS) over the course of five years or until they turn 59 ½, whichever is longer. Most exceptions to the early withdrawal rule penalty require money to be used for a specific qualified, reason. However, funds withdrawn using the 72(t) rule don’t require a specific reason.

Withdrawals for younger people are typically limited to the exceptional events in life, like medical emergencies, college tuition or some economic hardships. However, the 72(t) rule has a strict set of steps where early withdrawals can be taken for any reason, as long as the rules are followed.

How does it work? You may know that you can schedule several SEPP distributions per year. However, in this case, you must take at least one distribution per year for five consecutive years, or until you reach 59 ½ years of age. Once the distributions begin, the payments may not be modified. If a mistake is made and payments are changed, the cost is high—a 10% early withdrawal penalty is imposed retroactively, starting with the first year of distribution.

You may also not use this rule to take distributions from a retirement account associated with a current job. They are not eligible for SEPPS.

Here are further options:

Required Minimum Distributions (RMDs) are calculated annually by dividing the distributable balance by the life expectancy listed on an IRS life expectancy table. The tables are based on a uniform lifetime, single life expectancy or joint and last survivor life expectancy. Your estate planning attorney will be able to help you determine which table should be used to get the calculation for your RMD.

Fixed amortization amortizes the distributable balance based on a selected life expectancy table and the IRS-approved interest rate. Once calculated, the annual payment amount stays constant for each successive year.

Fixed annuitization determines payments by dividing the distributable amount alone by the IRS’s published annuity factor applicable to the investor’s current age—or the investors and beneficiary’s current ages. Once the payment method, size and frequency of payments is determined, you are locked into drawing those payments for the next five years or until you reach 59 ½.

Any changes to the payment will result in an expensive 10% penalty – retroactive to all withdrawals.

While this is a good way for younger earners to access retirement money, it doesn’t provide any flexibility and can’t be modified or terminated without hefty penalties.

Reference: U.S. News & World Report (Aug. 23, 2022) “What is Rule 72(t)?”

Is Now a Good Time for a Roth Conversion?

“A Roth conversion involves liquidating assets in a tax-advantaged account like a traditional IRA or 401(k), paying taxes on the withdrawal, and then funding a Roth IRA. In the short run, investors will pay taxes (more on that below).”

There are many benefits to a Roth IRA, according to a recent article from Financial Advisor titled “Be Ready to Answer Questions About Roth Conversions In This Down Market.” Investors don’t pay taxes on future withdrawals and there are no minimum required distributions (RMDs) as there are for traditional IRAs and 401(k)s. Having to take an RMD after 72 and older can bump taxpayers into the next tax bracket, causing unwanted tax liability during retirement. You can also pass a Roth IRA onto an heir, as long as you meet the requirements, with no taxes to your heirs.

Why Doesn’t Everyone Have A Roth IRA?

Roth IRAs were originally created to expand the number of workers who had access to IRAs, while minimizing the short-term impact on the federal budget. They went into effect in 1998 and are named for William Roth, a U.S. Senator from Delaware. There are eligibility limits on Roth IRAs. Modified Gross Income must be under $144,000 in tax year 2022, and if married and filing jointly, MAGI must be under $214,000.

Benefits of Converting from a Traditional IRA to a Roth IRA

The best candidates for a Roth conversion are people who can afford to pay taxes due when funds are moved from a traditional IRA to a Roth IRA. Some people wait until they retire, when their income tax levels drop and paying the upfront taxes becomes more palatable.

If you don’t foresee needing all assets to pay day-to-day expenses in retirement and you have at least a moderate size IRA and brokerage account, a Roth IRA could be a good move. The same is true for someone who is years away from having to take RMDs (Required Minimum Distributions) or hasn’t yet filed for Social Security benefits.

Who Shouldn’t Do a Roth Conversion?

Most people who are working shouldn’t do a Roth conversion. Instead, they should wait until they are in a lower tax bracket before taking funds from an IRA, 401(k), SEP or other tax deferred accounts. Investors with modest IRAs and brokerage accounts won’t benefit as much as a Roth account.

When possible, conversions should also be done in smaller amounts, staggered over the course of several years.

Roth conversions are an excellent tool for estate planning. Heirs of Roth IRAs aren’t taxed on withdrawals, while they are taxed on withdrawals from traditional IRAs and have only a ten-year window in which to empty traditional accounts.

Speak with your estate planning attorney before embarking on a Roth conversion to be sure it is the best move for you from a tax and estate planning perspective. Aligning a Roth conversion with your estate plan will yield the best results.

Resource: Financial Advisor (July 6, 2022) “Be Ready to Answer Questions About Roth Conversions In This Down Market”

How Do Special Needs Trusts Work?

“Special needs trusts can help fund quality-of-life improvements for the beneficiary, such as a phone, a trip or a private room in a group care facility.”

Parents with disabled children worry about how their offspring will manage when parents are no longer able to care for them. Leaving money directly to a child receiving means-tested government benefits, like Social Security Supplemental Income or Medicaid, could make them ineligible for these programs, explains an article from Kiplinger titled “Estate Planning: A Special Trust for a Special Need.” In most states, beneficiaries of either program are only allowed to have a few thousand dollars in assets, with the specific amount varying by state. However, the financial support from government programs only goes so far. Many families opt to have their own family member with special needs live at home, since the benefit amount is rarely enough.

The solution is a Special Needs Trust, which provides financial support for a disabled individual. The SNT owns the assets, not the individual. Therefore, the assets are excluded from asset limit tests. The funds in the trust can be used to enhance quality of life, such as a cell phone, a vacation or a private room in a group living facility. The SNT is a means of making sure that a vulnerable family member receives the money and other relatives, such as a sibling, don’t have a financial burden.

SNTs can only be created for those who are younger than age 65 and are meant for individuals with a mental or physical disability so severe they cannot work and require ongoing support from government agencies. A disabled person who can and does work isn’t eligible to receive government support and isn’t eligible for an SNT, although an estate planning attorney will be able to create a trust for this scenario also.

Each state has its own guidelines for SNTs, with some requiring a verification from a medical professional. There are challenges along the way. A child with autism may grow up to be an adult who can work and hold a job, for instance. However, estate planning attorneys recommend setting up the SNT just in case. If your family member qualifies, it will be there for their benefit. If they do not, it will operate as an ordinary trust and give the person the income according to your instructions.

SNTs require a trustee and successor trustee to be responsible for managing the trust and distributing assets. The beneficiary may not have the ability to direct distributions from the trust. The language of the trust must state explicitly the trustee has sole discretion in making distributions.

Because every state has its own system for administering disability benefits, the estate planning attorney will tailor the trust to meet the state’s requirements. The SNT also must be reported to the state. If the beneficiary moves to another state, the SNT may be subjected to two different sets of laws and the trustee will need to confirm the trust meets both state’s requirements.

SNTs operate as pass-through entities. Tax treatment favors ongoing distributions to beneficiaries. Any earned investment income goes to the beneficiary in the same year, with distributions taxed at the beneficiaries’ income tax rate. Trust assets may be used to pay for the tax bill.

As long as all annual income from the trust is distributed in a given year, the trust will not owe any tax. However, a return must be filed to report income. For any undistributed annual investment income, the trust is taxed at one of four levels of tax rates. These range from 10% and can go as high as 37%, depending on the trust income.

An SNT can be named as the beneficiary of a traditional IRA on the death of the parent. Investments grow tax deferred, as long as they remain in the retirement account and the SNT collects the required minimum distributions for the retirement account each year, with the money passing as income. However, any undistributed amount of the required distribution will be taxed at the trust’s highest tax rate.

Reference: Kiplinger (June 8, 2022) “Estate Planning: A Special Trust for a Special Need”

RMD Formula Changes for First Time in 20 Years

“The IRS has good news for retirees: you can now keep more money in your tax-deferred retirement accounts thanks to lower required minimum distributions (RMDs).”

For the first time in two decades, the IRS has updated actuarial tables used to determine Required Minimum Distributions, the amount taxpayers are required from their retirement accounts starting at age 72, reports Yahoo! Money in the article “Good News for Retirees: RMD Formula Changes for First Time in Decades.”

The new tables rely on longer lifespans to calculate RMDs from tax deferred accounts, including traditional IRAs, 401(k)s and other similar retirement accounts every year.

One of the key benefits of retirement accounts are the tax advantages they offer. Traditional IRAs and 401(k)s allow savers to defer taxes until funds are withdrawn, letting their investments grow over an extended period of time. However, as with all good things, there are limits. To encourage people to take funds from the accounts (which generate tax revenues), the IRS requires a certain amount of money be taken out after a certain age.

The age requirements have changed over the years. Before the SECURE Act of 2019, withdrawals were required starting at age 70.5. After the SECURE Act, if you reached age 70.5 in 2019, the prior rules applied, and you had to take the first RMD by April 1, 2020. However, if you reached 70.5 in 2020 or later, the first RMD needs to be taken by April 1 in the year after you reach age 72.

Here are the accounts subject to RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), retirement plan from private sector employers
• 403(b), retirement plan for public employees and nonprofits
• 457(b), retirement plan for some state and local government employees

Profit sharing plans and other defined contribution plans are also included in this category. Roth IRAs are not subject to RMDs.

With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will also need to make their retirement savings account last longer. Therefore, the RMDs starting in 2022 will be less than those from the prior calculation, which has been the same since 2002. Smaller RMDs will also lower tax liabilities and might even put some people into a lower tax bracket.

You can still withdraw as much as you like from an IRA or the accounts listed above. However, be mindful of the resulting tax bill.

Reference: Yahoo! Money (June 15, 2022) “Good News for Retirees: RMD Formula Changes for First Time in Decades”